MS Iceland Dairies found to severely abuse its dominant market position

• Get document
• Case number: 19/2016
• Date: 14/7/2016
• Company:
  • Kaupfélag Skagfirðinga svf.
  • Mjólka ehf.
  • Mjólkursamsalan ehf.
• Sectors:
  • Consumer goods, supplies and etc.
• Policy Area:
  • Abuse of dominance
• Summary

  The Icelandic Competition Authority (ICA) has, by means of a new decision published today (No. 19/2016) imposed an ISK 480m administrative fine on Mjólkursamsalan ehf. (MS Iceland Dairies, hereinafter referred to as MS) due to serious violations of the Competition Act. MS abused its dominant market position by selling its competitors basic raw material for the production of dairy products at an abnormally high price, while at the same time, MS and associated parties were sold the same raw material at a much lower price, and, additionally, below cost of production. This meant that MS and associated parties were given a significant market advantage over their competitors. In doing so, the ability of the competitors to compete with MS and associated companies was significantly reduced and the interests of consumers and farmers harmed. It is clear that MS provided the ICA with incorrect information and neglected to inform the Authority about important data. This has delayed the resolution of the case and has been detrimental to competition.

   

  The Authority's earlier decision (No. 26/2014) was annulled by the Competition Appeals Committee. The Appeals Committee recommended that the ICA re-examine the case, as MS had submitted new data to the Committee which was not provided to the Authority when the case was first examined. With the decision published today by the ICA, the ICA has completed the investigation recommended by the Committee.

  Background to the investigation

  Non-pasteurised milk (raw milk) is a basic raw material in the production of all forms of dairy products. The pricing of and access to such raw material, therefore, is extremely important for all companies that produce and sell dairy products.

  Mjólkursamsalan (MS) is the only company in Iceland that sells raw milk wholesale to other dairy goods producers, as well as using it for its own production. 

  MS is in a significantly strong position in the Icelandic dairy market and receives approximately 90% of the raw milk produced by farmers. In addition, MS is closely associated with the second largest company in the dairy market, Kaupfélag Skagfirðinga (KS). Together, these companies very nearly monopolise milk transactions in Iceland. 

  Mjólka (hereinafter referred to as Mjólka I) was a competitor of MS and KS until the end of 2009 when KS took over the company. Since then, it has continued to operate under the same name as a subsidiary of KS (hereinafter referred to as Mjólka II). In 2010, the founder of Mjólka I began, together with others, the operation of a new company in the dairy market, Mjólkurbúið Kú ehf. (Mjólkurbúið).  

  At the end of 2012, Mjólkurbúið became aware that the company had to pay a considerably higher price for raw milk than its competitor, Mjólka II. Mjólkurbúið realised this fact when MS, by mistake, sent the company an invoice for the purchase of raw milk that was intended for Mjólka II. The consequence of this was that Mjólkurbúið lodged a complaint with the ICA at the beginning of 2013 and the investigation of the case began. The matter under investigation was whether MS had, in the period from 2008 to 2013, abused its dominant position with respect to Mjólka I on the one hand and Mjólkurbúið on the other hand.  

  On 22 September 2014, the ICA issued its decision in the case and found that MS had abused its dominant position and disrupted competition during this period. The investigation revealed that Mjólka I and subsequently Mjólkurbúið had had to pay up to 17% more for the raw milk than the price that KS and Mjólka II paid. The price difference was up to 21% as regards the price paid by the production department of MS for the raw milk.  

  The ICA considered it appropriate to fine MS ISK 370m for these violations. 

  MS appealed the ICA's decision to the Competition Appeals Committee, which pronounced its ruling in the case on 16 December 2014. MS submitted, for the first time, a particular document to the Committee, i.e. an agreement with KS from 15 July 2008. MS was of the opinion that this document was of great importance and that it showed that the actions of the company were legitimate. 

  During the ICA's investigations, however, MS had never referred to or disclosed this agreement, despite repeated ICA requests for explanations and documentation from MS as regards the pricing of the raw milk.  

  The Competition Appeals Committee asked MS to explain why the agreement had not been submitted to the ICA. The conclusion of the Committee was that MS had not submitted any “tenable explanations” for the company's failure to do so. The Committee was of the opinion that MS had furthermore not provided any real explanation as to why “fundamental data” on the implementation of the agreement and settlement had not been submitted during the Committee's processing of the case. 

  Notwithstanding the aforementioned, the Competition Appeals Committee was of the opinion that “it was under obligation, on the basis of the investigative rules of administrative law, to steer the case in the direction of discovering the truth about these issues” and that the Committee was unable to take a substantive position on the case. The Committee said that it was “unavoidable to annul the appealed decision of the ICA and to instruct the ICA to take a new position in the case on completion of further investigations and on having obtained opinions on the substance of the agreement between the appellant and KS from 15 June 2008, settlements between the parties to the agreement and its implementation during the period in which the alleged violations took place.”  

  The ICA's new investigation began on 19 December 2014. Once the collection of evidence was completed, the ICA on 22 October 2015 sent to MS a statement of objections setting out its preliminary findings. Comments to the statement of objections from MS were received by the ICA on 12 January 2016. Further data and opinions were subsequently collected. A decision has now been reached. 

  New decision

  In the new decision, published today, the ICA again takes a position as regards the actions of MS after having further investigated the matter in accordance with the instructions of the Competition Appeals Committee. The conclusion, in a nutshell, is that the new evidence shows that MS's violations of the Competition Act are even more serious than was considered to be the case in the previous decision. In addition, MS has been shown to provide the ICA with incorrect information and neglected to inform the Authority about important data.  

  The new decision confirms the above price difference of raw milk to, on the one hand, Mjólka I (i.e. while the company was an independent competitor of MS and KS) and Mjólkurbúið and, on the other hand, to MS itself, KS and Mjólka II (i.e. under the ownership of KS). In addition, it is clear that differences in cost or other objective grounds could not justify this price difference. It has been shown that MS, in fact, sold raw milk to KS and Mjólka II at a price that did not cover MS's cost of the transaction. If KS and Mjólka II had had to pay the same price as their competitors for raw milk from MS, then their raw material cost would have been around ISK 239m greater than was the case in the period from 2008 to 2013.

  In support of the contention that the actions of MS did not distort competition, the company has repeatedly maintained that Mjólka I was very poorly managed and that this was the reason why the owners of the company sold it to KS in 2009. The decision of the ICA, however, shows that if the production department of MS had had to pay the same raw material price as Mjólka I, this part of MS's operation would have been run at a considerable loss.

   

  New data shows that the sale of raw milk at the low price to KS was an action intended to weaken Mjólka I as a competitor or to force the company to exit the market. Mjólka I had achieved some success in selling grated cheese and had provided some competition in this respect. MS and KS decided that KS should focus on the production of grated cheese in competition with Mjólka I and that the company would obtain the raw milk at the low price. When MS subsequently significantly increased the price of raw milk to Mjólka I in mid-2009 (the price to KS and MS itself remained the same), Mjólka I was forced out of the market and KS took over the company. Once the competition restraints from Mjólka I had been removed, MS organised an increase in the price of grated cheese. The profits of this increase were divided between MS and KS. 

  The explanations that MS has provided for the difference in the price of raw milk to KS and Mjólka II on the one hand and to Mjólka I and Mjólkurbúið on the other hand have been both inconsistent and wrong. 

  • Initially, MS incorrectly explained that the price of raw milk to the other unrelated parties was in accordance with the wholesale price decided by the Agricultural Goods Pricing Committee. The Agricultural Goods Pricing Committee, however, informed the ICA that it had not, during the period under investigation, decided the wholesale price of raw milk. The price on which MS chose to base its pricing of raw milk was the wholesale price of processed dairy products, i.e. pasteurised whole milk, as decided by the Committee. In other words, MS sold the unrelated competitors the important raw material at a price that was based on the price of processed goods. In this manner, the unrelated competitors were forced to pay twice for the same cost items in the primary processing of the milk, which clearly had a detrimental effect on their ability to compete.

  • MS explained that the sale of raw milk to KS and Mjólka II at the lower price was a price transference permitted by the Act on the Production, Pricing and Sale of Agricultural Products. MS later claimed that a price transference had not been involved.

  • The basic view of MS in support of the legality of its actions has been based on Article 71 of the Act on the Production, Pricing and Sale of Agricultural Products and the aforementioned agreement with KS from 2008. The Act on the Production, Pricing and Sale of Agricultural Products grants processing plants in the dairy industry authorisation to divide tasks among themselves in the interests of efficiency. MS has repeatedly maintained that this collaboration with KS meant that the production of high profit-margin products had been transferred from KS to MS and that KS had concentrated on the production of low profit-margin products. In order for this division of tasks to be realistic, KS had to be compensated for the loss of profit margin this involved and that this had been done by selling the raw milk to KS at such a low price. Such sale was, according to MS, “an integral part” of their division of tasks which the legislature had permitted.  

  The investigation carried out by the ICA, however, has shown that this is in all respects incorrect. Data from KS, for instance, show that the opposite occurred. KS ceased the production of goods with a low profit-margin and increased the production of goods with a high profit-margin (including grated cheese). When account is taken of the overall effects, this reveals that the profit margin of KS was considerably higher than that of MS during the period investigated. There was no need to compensate KS for loss of profit margin. The main reasoning provided by MS for its actions, therefore, is based on incorrect assertions as regards the facts of the case.   

  By means of Act No. 69/1998, the legislature amended the Act on the Production, Pricing and Sale of Agricultural Products towards greater freedom. This amendment provided that instead of a fixed price, the Agricultural Goods Pricing Committee was to determine the minimum price of raw milk to farmers. The assumption was that competition between processing plants would improve terms for farmers and that they would be paid a higher price than the minimum price. The ICA's investigation, however, revealed that MS reached an agreement with KS where such competition was prevented. It has been shown that when there was competition from Mjólka I, this had the effect of raising prices to farmers and lowering prices to consumers. 

  With the amendment to the Act on the Production, Pricing and Sale of Agricultural Products in 2004, the provisions of the Competition Act which were to combat competition-restrictive mergers and collusion were set aside in the dairy market. Prior to the amendment, there were five dairy production plants operating in Iceland. However, following the law amendment, mergers have taken place where it has been possible to intervene on the basis of the Competition Act. As a result, MS and related companies in the processing and wholesale distribution of dairy products have gained a position that is close to a monopoly. Consequently, the competitive position of the competitors of MS is extremely difficult and sensitive. Under those circumstances, MS, as a dominant company in the relevant market, has a particularly strict obligation by law to refrain from any action that could restrict any competition that can exist in the dairy market.  

  The conclusion of the ICA is that MS seriously violated the Competition Act. The competitors of MS had to accept having to purchase basic raw material at abnormally high prices as well as MS itself and related parties obtaining the same raw material at much lower prices. Not only did KS and Mjólka II get the raw milk at much lower prices than their competitors, it was also priced by MS below cost price. This had the effect of granting them a significant competitive edge over their competitors. This was also the object of the actions carried out by MS. In this manner, the ability of the competitors to compete with MS and related parties was seriously diminished and the dominant position of MS protected. This has the final consequence of harming the interests of consumers and farmers. It has been shown that MS provided the ICA with incorrect information in the earlier case and neglected to inform the Authority about important data. This has delayed the resolution of the case and has been detrimental to competition.

   

  The ICA considered that it would be appropriate to fine MS a total of ISK 480m.